Chapter 6 – Sources of Funds (2): Mudharabah in Islamic Banking

30 question-and-answer flashcards covering definitions, roles, legality, characteristics, types, provisions, banking applications, and investment account distinctions for Mudharabah in Islamic finance.

What is the basic definition of a Mudharabah contract in Islamic finance?

A profit-sharing partnership where one party provides capital (sahib al-mal) and the other provides labor/expertise (mudarib).

In Mudharabah, who is the sahib al-mal?

The capital provider or investor who supplies the funds.

What term is used for the manager/entrepreneur in a Mudharabah partnership?

Mudarib.

How are profits distributed in a Mudharabah agreement?

According to a pre-agreed ratio between the rabb al-mal and the mudarib.

Who bears financial losses in Mudharabah if no negligence occurs?

Only the capital provider (rabb al-mal).

Which Qur’anic verse is frequently cited as evidence for the legitimacy of Mudharabah?

Qur’an 73:20 – referring to people who ‘go about the land in search of God’s bounty.’

Name one hadith that supports Mudharabah practice.

The Prophet ﷺ acted as a mudarib for Khadijah (RA) before marriage, showing tacit approval of Mudharabah.

What consensus (Ijma) evidence supports Mudharabah?

Companions invested orphan’s property via Mudharabah without scholarly objection.

List the three core characteristics of Mudharabah.

(1) Profit sharing, (2) Loss borne by capital provider, (3) Shariah compliance.

What is Mudharabah Mutlaqah?

Unrestricted Mudharabah where the mudarib has full freedom to manage the funds.

What is Mudharabah Muqayyadah?

Restricted Mudharabah in which the rabb al-mal imposes specific limits on how and where funds are invested.

Under Mudharabah Mutlaqah, who monitors overall progress while not managing day-to-day operations?

The capital provider (rabb al-mal).

If a loss occurs due to the mudarib’s negligence, who is liable?

The mudarib becomes liable for the loss.

Why is Mudharabah considered more equitable than conventional interest-based loans?

Returns depend on actual future profits rather than guaranteed interest, sharing both risk and reward.

What must Ra’sul Mal be composed of in a valid Mudharabah?

Standard money (not goods or debt) that is known and specified at contract time.

Name the six essential elements of a Mudharabah contract.

Rabb al-mal, Mudarib, Ra’sul Mal (capital), Al-Amal (project), Ribh (profit share), Sighah (offer & acceptance).

State two main provisions regarding profit in Mudharabah.

Profit must be (1) a percentage of actual profit, not a fixed sum, and (2) agreed at the outset.

Can the mudarib draw a periodic salary from the Mudharabah capital?

No, except limited living expenses while on business travel (per Hanafi view).

What is meant by ‘two-tier Mudharabah’ and is it permitted?

Creating multiple layers of Mudharabah contracts; it is prohibited.

Explain the rule on ‘non-transferable stock’ in Mudharabah.

The mudarib cannot transfer or pledge the capital/stock without the rabb al-mal’s consent.

How is a Mudharabah contract terminated according to Shariah?

Either party may terminate with notice; assets are liquidated and profits shared per agreement.

In Islamic banking, who usually plays the role of sahib al-mal when financing customers’ businesses?

The bank provides capital, making it the sahib al-mal, while the customer acts as mudarib.

What supervision right does an Islamic bank retain over a customer’s Mudharabah business?

The bank may review business reports and request supporting documents to monitor performance.

What distinguishes a Mudharabah General Investment Account (MGIA) from a deposit account?

MGIA is based on profit-and-loss sharing (no guaranteed principal or return) managed at the bank’s discretion.

Name two key differences between MGIA and MSIA.

MGIA is unrestricted with no minimum amount; MSIA is restricted, usually larger, with negotiated terms.

Who are typical investors in a Mudharabah Special Investment Account (MSIA)?

Government entities, corporations, or high-net-worth individuals seeking specific projects.

What happens to profit if one Mudharabah transaction suffers a loss but others make gains?

Profit must first offset the loss; remaining profit is then distributed by the agreed ratio.

Under Hanafi and Hanbali views, can a Mudharabah be set for a fixed term?

Yes, they allow specifying a duration (e.g., six months) without needing extra notice for termination.

Why can’t the mudarib lend out Mudharabah capital without consent?

Because loans are not part of the agreed business and expose the rabb al-mal to unauthorized risk.

What ethical principle underlies the wisdom of Mudharabah in Islamic finance?

Fair collaboration between capital holders and skilled entrepreneurs, promoting socially responsible investment.